Friday, January 8, 2010

Remember the Y2K scare back in the late 1990’s, where the fear that computers wouldn’t be able to properly analyze data at the rollover of the Millennium, causing a worldwide computer crash? Of course, “Y2K” stood for the year 2000, and correspondingly, “Y2K10” is for the year 2010. Some might say that we’re experiencing a “new world order,” but I see the same bad patterns repeating themselves as in prior decades. Let me explain…

When I graduated from college in the 1970’s, Japan was considered to be the new leader in global industrial production. I vividly remember that as part of my senior class at the University of Tennessee, I could pay extra to go to Japan and analyze their manufacturing process firsthand. Since it meant paying extra, I elected to go to Chattanooga.

It found it extraordinary that a car could be built in Tokyo, shipped halfway around the world to Savannah, Georgia and subsequently trucked up to a dealership in Atlanta where it would be sold cheaper than you could buy a GM or Ford, which were manufacturer inside the perimeter. I always wondered how that was possible, but at that time, Japan was believed to be the most industrious and dynamic country for business in the world.

As with all things that seem too good to be true, Japan’s stellar reputation was really just a case of a distortion of facts. During the great economic boom in the East, Japan was enjoying a currency advantage of a yen to dollar ratio of 300 to 1. During the 1980’s, as the yen continued to strengthen against the dollar, it wasn’t long before 100 to 1 yen was commonplace. During that time, we found out that the Japanese economy was, in fact, full of a lot of problems, many more than we ever believed to be true. And as of right now, the yen is at 93.

In order to accommodate for the slowdown in production and the lack of exports due to the strong yen, Japan went on a binge of new debt. To shake their economy out of its doldrums, the Japanese cut their interest rates to essentially zero and began a massive spending program of government-sponsored stimulus plans. Sound familiar? Even with the enormous spending spree, Japan’s economy continued to be on the brink of a recession, and it has remained there for the last 20 years. In the 1970’s, the Nikkei 225 crested at over 40,000. As of today, that same index is valued at 10,681, going down a cool 75% in the intervening 35 years.

As such, Japan is in the worst situation a country could financially be in. As of today, their government debt is a whopping 200% of their gross domestic product. They have dug such a deep hole of debt that their economy cannot grow due to all of the constraints and money necessary to fund their debt.

My point isn’t to call attention to the evils of Japan’s economy. Rather, I want to give you some insight as to where the U.S. economy might be heading in the future. I don’t think it’s unrealistic to assume that the U.S. could find itself in Japan’s situation if it remains on its current path.

During World War II, the United States’ debt to gross domestic product ratio was over 100%. Given the U.S.’s need to expand the war effort, it isn’t surprising to see that much debt in an economy that was completely slowed down by the Great Depression and World War II. However, immediately after the war, under the Truman administration, the debt began to fall precipitously. Even during the Kennedy and Johnson administrations in the 1960’s, when the war in Vietnam ensued, the U.S. debt was less than 50% of its gross domestic product, and the debts as a percentage of GDP didn’t get back to the 50% level until the end of the George H.W. Bush administration (which was during the Gulf War). At the start of the Clinton administration, the ratio fell markedly and only started to increase again in 2009. Our debts compared to our GDP are now increasing in staggering proportions.

Last week, the committee responsible for our federal budget issued a report indicating that the total U.S. public debt had jumped to $7.6 trillion – or 53% of GDP – from $5.7 trillion – or 41% of GDP – in the last year. Furthermore, did you know that just days before this past Christmas, Congress agreed to extend the limit on our national debt to $14 trillion? This is an increase of $1.8 trillion – chump change to this Congress! Thank you, Congress, for the worst Christmas present to Americans ever.

What is most interesting about this increase in national debt is that it really isn’t needed this year. The national debt was increased in 2009 because they knew that it would be politically impossible to increase the debt during 2010 due to it being an election year. I noted with interest that the next vote to increase the national debt does not occur until after those elections in 2010. With the national debt growing at approximately $1.5 trillion annually, it now seems that Congress will have to increase it every year to keep up with their irresponsible spending.

I hope that everyone is aware of how large the U.S. economy is at the current time. The U.S. GDP is now almost exactly $14 trillion. That is almost three times the size of any other country in the world. We have the largest economy ever recorded in world finance. Based on current government spending trends, the debt will continue to increase through 2018, at which time it will reach 85% of the GDP. In 2022, it will be 100%, and in 2038, it will reach 200%, at which point we will finally have outdone the Japanese.

I couldn’t help but be amused when I recently heard certain Democrats say that President George W. Bush was “the most fiscally irresponsible president in history.” In the final year of the Bush administration, the deficit was approximately $800 billion. At the end of the first year of the Obama Administration, it’s at $1.4 trillion and is expected to be at $1.5 trillion next year. In just over 10 months, Congress has approved over $1 trillion in financial support for public service jobs, which incidentally, do nothing whatsoever to create new jobs in the private work sector. Even President Reagan’s deficits – when he cut income taxes by 50% – were always less than $200 billion per year and the public service national debt never exceeded 40.9% of GDP. In contrast, this year’s debt will hit 61% of GDP and will quickly move to 68% in the next fiscal year.

A review of the following chart (which is obviously hypothetical beyond 2010) produced by the Peterson-Pew Commission on Budget Reform should leave you more than just a little scared. This chart assumes that spending will continue at its current rate. As should be clear to anyone, this massive amount of debt simply cannot be sustained.

If we do nothing more over the next 10 months prior to the mid-term elections, we at least need to make sure that all of our Congressmen understand the importance of fiscal responsibility. Already, the amount of money necessary to fund the debt will hold back the growth in the U.S. economy until we finally stop it in its tracks. However, when the national debt is growing at $1.5 trillion, it’s not like we’re even close.

It’s almost impossible to assume that you could increase taxes high enough to cover these tremendous deficits. It’s now estimated that tax rates would have to triple for every American paying taxes today to even get close to balancing the federal budget.

I have no idea what Congress is thinking as it relates to these matters, but I can tell you almost assuredly that they are not thinking of this country’s best interests. During the last decade, we have had two pronounced recessions in the United States. It would be natural to assume that government has cut back on spending during these recessions to accommodate reduced revenue from taxes, and that government has reduced in size. Unfortunately, that is not the case.

Total nominal federal spending has soared 97% – nearly 10% per year – over the last decade. During the corresponding same time, the economy has only grown at approximately 60%. You don’t need to be an economist to understand that the wealth of a nation is created by the private sector, not the public sector. Nevertheless, our public sector is growing at greater than 50% of our private sector.

The White House now estimates that in 2019, the interest payments alone on the debt will be $774 billion. This is not a guess reported by Fox News; this estimate comes directly from the White House. That amount alone is greater than every item in the federal budget today except non-defense discretionary programs. I find that absolutely frightening.

Those of you who know me well know that I am an optimist at heart. I can even find rays of sunshine in the projections I am relaying to you today. The current spending in Washington is so over-the-top and unnecessary that I believe it will only force reform. Obviously, reform will not be a result of my blog rants; it can only be achieved by eliminating the people who are currently in Congress.

I get so tired of the hearing the talking heads say that we must spend a trillion dollars to fix the problems they inherited. That excuse doesn’t hold water anymore. The economy is now stabilized and doesn’t require or need this excessive spending.

This past week, California demanded that the government give their state with an additional $10 billion in 2010 to finance their deficits. The major way the federal government could stop spending money today is by forcing states that have been fiscally irresponsible to pay their own way. It is completely obscene that the federal government turned over $80 billion to states to bail them out of their own poor decisions. Instead, they should immediately force the states to be financially responsible.

Once the public finally sees the states performing massive lay-offs to finance their operations, those politicians will also be gone and new ones who are fiscally responsible will be elected. While it’s true that the states will have to terminate many employees, that’s the way it should be. If these people are good at what they do, they’ll find jobs in the private sector, which is where they should’ve been employed in the first place.

We must immediately stop all of the ridiculous give-away programs related to foreclosed homes. The programs don’t work anyway and they are prolonging the recovery in the real estate world. But most importantly, these programs simply aren’t fair to you and me. Why should one homeowner receive financial relief from the government when the rest of us have had to make our mortgage payments? If we took the homes out of weak hands and put them into strong hands, we would be closer to an end in this real estate downturn than just in the middle.

There’s a misperception in the national press that the number of households are somehow shrinking due to foreclosures. That’s ridiculous! There’s the same number of households today as there were last year, if not more, and these people still need homes to live in (although they probably can’t afford to own one right now). It’s perfectly fine for those who cannot afford to buy a home to rent one instead. After all, it worked fine for the first 234 years of this country.

I don’t know what economic textbook Washington reads, but the new health care proposal only represents their lack of economic knowledge. Quite simply, the goal is to cover 35 million Americans who currently don’t have health care benefits. Additionally, the government is requiring the insurance companies to cover everyone regardless of pre-existing conditions or medical history. Most importantly, everyone’s health insurance will cost the same regardless of age, health conditions, and other environmental matters. With all of these new requirements for the insurance companies, the government says that the cost of medical insurance will decrease. If you try to teach that type of economics in college, even the students would laugh at you.

The answer to economic expansion isn’t new governmental spending but less. The way to get the economy growing is to cut taxes, not raise them. I’ve been writing about that basic economic lesson for decades and not a single critic has been able to present a convincing argument to the contrary. The cost of government must go down dramatically. We must have national defense paid by the government, but virtually everything else is discretionary and needs to be dramatically reduced.

Social Security could be made viable tomorrow by simply increasing the retirement age for everyone under the age of 35. I once heard Dr. Greenspan say that we could solve the Social Security problem in 10 minutes even with the first 8 minutes used for cordial greetings of the participants. That’s the one thing Dr. Greenspan said that is probably accurate.

We’re not talking about reducing government spending by an extraordinary number. As I’ve demonstrated herein, it’s economically impossible for the U.S. to increase tax rates high enough to cover our deficits. Even if we did, the taxing burden to the economy would essentially shut down the U.S. economy for decades to come. The one and only solution to the deficit issue is to reduce federal spending. If we simply returned to the same governmental spending that was done during 2000, this goal would be accomplished. We need to eliminate the waste and political pork barrel from the government. This doesn’t seem like it would be that big of a burden to me.

If reductions are made to the public sector, there’s no doubt that many of these employees will need to find jobs in the private sector. A lot of the funding for the arts, education and some frivolous programs would have to be paid for by the private sector. I believe that’s the way it should be anyway, as I can think of no justification for the federal government to take money from all of its citizens and use it for anything irresponsible. If the patrons of these programs love them so much, then they should fund and support them. If not, they shouldn’t survive.

In short, in order to solve the financial problems of the United States, our federal and state governments must be forced to become more fiscally responsible. As President Obama said in 2006 at the Senate Debt-Ceiling Debate, when he was a first-term Senator, “Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.” Interestingly, that was also $2 trillion of new government debt ago – in less than four years.

The foregoing are my opinions, thoughts, forecasts and projections. As always, I could be wrong.

I am glad to see the “From the Desk of Joe Rollins” blog back in action! I finally got a chance to sit down and read the latest blog and decided I had better put my secondary education to use and respond to the following paragraph in the blog:

I don’t know what economic textbook Washington reads, but the new health care proposal only represents their lack of economic knowledge. Quite simply, the goal is to cover 35 million Americans who currently don’t have health care benefits. Additionally, the government is requiring the insurance companies to cover everyone regardless of pre-existing conditions or medical history. Most importantly, everyone’s health insurance will cost the same regardless of age, health conditions, and other environmental matters. With all of these new requirements for the insurance companies, the government says that the cost of medical insurance will decrease. If you try to teach that type of economics in college, even the students would laugh at you.

Well, rather than laughing, this student would look at this argument with a critical eye.

Assuming the statements above regarding new requirements on insurance companies are factual and that claims of reduced medical insurance costs have been made, my reaction would include the following thoughts:

If costs of medical insurance will be “universal,” then that would mean that there must be some balancing of costs, and some individuals would experience an increase in cost of insurance and some would experience a decrease in cost of insurance.

If insurance companies will be required to insure those now without insurance due to “cherry picking,” or accepting only customers with lower expected loss, then you can expect insurance premiums for those now insured to increase.

However, if those uninsured individuals with high expected medical loss are currently seeking treatment without insurance and not paying (at least) for their medical care they are receiving, then the cost of production for medical care providers must increase to include the loss when rendering services for free or discounted price to these uninsured. When these individuals are insured and medical care providers are being paid full price for all services rendered, they do not have to factor free or discounted services into their cost of doing business and the price of medical care can be reduced.

Finally, according to several studies, only a very small fraction of the uninsured are uninsured because of denial of coverage due to pre-existing health conditions and furthermore, the typical uninsured person in the United States is young and relatively healthy. If this is true then, you can assume that their expected loss could be less than the typical currently insured person. Since insurance premiums are a function of average expected loss, adding individuals with less expected loss to insurance plans will decrease the premiums for everyone in the plan.

So all in all, it is not clear to the critical eye with a cursory glance and without much more detailed information if this situation would increase or decrease the cost of medical insurance.

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